Friday, May 11, 2012

New York Court Rejects $90 Million D&O Settlement

In In re Lehman Brothers Securities and ERISA
Litigation, 2012 U.S. Dist. LEXIS 65167 (S.D.N.Y. May 3, 2012), Judge Lewis
A. Kaplan, for the United States District Court for the Southern District of
New York considered the reasonableness of a settlement between various former
Lehman Brothers directors and officers and their insurers.

Beginning
his opinion with a reference to Kenny Rogers’ The Gambler, Judge Kaplan observed that when it comes to
litigation, one must know when to hold ‘em and when to fold ‘em.In the context of a class action, he noted, a
court must act as the surrogate for the plaintiff class in determining whether
a settlement is reasonable, and as such, it fell on him to determine whether to
allow the parties “to fold ‘em.”

The
class action in In re Lehman Brothers
was brought on behalf of investors that had purchased or otherwise held Lehman
Brothers securities.Because Lehman Brothers
is in bankruptcy, the defendants were former individual officers and directors
and directors of the company.Before
Judge Kaplan was a $90 million settlement between these directors and officers
and Lehman Brothers’ insurer, which would be paid to the plaintiff class.If approved, all claims against the directors
and officers would be released, with these individuals paying no amounts from
their own pockets.

Lehman
Brothers originally had $250 million in available insurance limits.As a result of defense costs, however, this
amount had been reduced to $180 million by the end of 2010.The insurer took the position that it would
contribute to a settlement only on the condition that it resolved all claims
against the individual defendants.The
individual defendants took the position that they would not contribute any
amounts toward a settlement other than through available insurance funds.In other words, they would not pay any
amounts out of their own pockets.Notwithstanding,
the individual defendants agreed to hire a consultant, a retired judge, to
determine whether their combined “liquid” and certain limited “non-liquid”
assets exceeded $100 million.The
consultant concluded that these assets were indeed less than $100 million.

With
this background in mind, Judge Kaplan considered whether a $90 million
settlement was reasonable under the circumstances.He acknowledged that if the settlement was
not approved, the available insurance funds likely would be erode rapidly
through payment of defense costs in the various lawsuits pending against Lehman
Brothers and their directors and officers.Should that happen, the directors and officers would be forced to rely
on their individual assets, whether liquid or illiquid, to defend and/or settle
the litigations.The amount sought in
these suits, he observed, could easily reach billions of dollars. Judge Kaplan observed that looking only to the
individual defendants’ liquid assets did “not permit the Court fully to
consider the factors pertinent to approving or rejecting the settlement,” nor
was the asset inquiry “as informative as necessary and appropriate for this
Court” to consider the reasonableness of the settlement.Accordingly, Judge Kaplan directed that
further inquiry be had into the entirety of the individual defendants assets,
liquid and non-liquid, so that the court could determine the reasonableness of
the settlement.